Need a loan? Maybe Earnest can help

Wednesday

Apr 30, 2014 at 6:00 AMApr 30, 2014 at 9:41 AM

Louis Beryl has off-the-charts brainpower, which he put to use for Wall Street. And now he wants to atone for its sins by making things better on Main Street. So he's making lower-interest consumer loans to people who can't get them from traditional sources. If you live in Massachusetts or Florida, Mr. Beryl's San Francisco-based consumer lending startup, Earnest, could make you a customer.

In April, a local resident decided that he wanted to propose to his girlfriend. As part of that proposal, he wanted to give her a diamond ring. Unfortunately, he lacked the cash to buy one. Earnest took a look at his earnings potential, savings and bill-payment habits, and a few other factors and decided he was good for a $3,000 loan at 6 percent Annual Percentage Rate (APR) — the actual yearly cost of funds over the term of a loan including any fees or additional costs associated with the transaction interest — to be repaid at the rate of about $250 a month.

Mr. Beryl has a stellar resume. A Florida native, he graduated from Princeton University with a degree in operations research and financial engineering, ran a statistical arbitrage trading unit at Morgan Stanley, and earned masters' degrees at Harvard's Business School and its Kennedy School of Government. In 2012, he became a partner at Silicon Valley venture capital firm, Andreessen Horowitz, and in September 2013 decided to start Earnest, which started making loans this March.

Why Earnest? One reason might be a personal experience. After he graduated from Princeton with plans to attend graduate school, he was a financially responsible adult who could not get loans or credit cards. When his sister, who was earning a masters' degree in social work from the University of Pennsylvania, faced the same problem when trying to get a credit card, he realized "there was a larger problem here, leading me to want to fix America's broken credit system. Moreover, my experience at Morgan Stanley and Lehman Brothers before it collapsed let me see everything that is wrong with Wall Street."

Earnest's mission is to offer financially responsible adults who lack long credit histories — and thus can't get loans and credit cards from banks and other traditional providers — "the lending option they deserve."

Earnest uses bespoke software to evaluate individual borrowers. Rather than looking at their credit history in isolation, this software considers "their current and future potential, analyzing data including income, savings, education history and future income potential," according to Mr. Beryl. "I saw plenty of people in graduate school who had jobs waiting for them at Nike, Heinz, 3M, in consulting firms and in financial services with great incomes and savings and they couldn't get credit."

Earnest charges qualifying borrowers what it considers a fair rate on a loan that must be paid off in a year — the loans can range in size from $1,000 to $10,000 (that one would cost under $330 in interest) — and Earnest's 6 percent APR would be less than half the average interest currently charged on a personal loan or credit card.

The rates charged on unsecured loans are much steeper than 6 percent. AvantCredit charges between 26 percent and 95 percent; credit cards extract 15 percent interest rates, and Lending Club collects between 15 percent and 18 percent interest with fees between 1 percent and 5 percent.

Earnest also dispenses with a significant amount of paperwork that must be mailed to a lender during the loan application process. It asks for a significant amount of documentation of an applicant's education, income, savings, credit history, and financial accounts but enables applicants to supply the information online.

"We don't have scores on applicants. We build financial profiles and develop a full picture of each individual's ability to repay under different scenarios," he said.

Moreover, because investors believe that Earnest is going to be good at picking borrowers who repay their loans, it is able to obtain financing for those loans at a low rate. Regrettably, Mr. Beryl declined to disclose the rate of interest it pays. But if it borrowed money for a year, it might be able to obtain it at an interest rate below 1 percent — giving it a substantial 5 percent profit on a 6 percent loan.

Will Earnest achieve its ambitious goals of fixing America's broken credit system? It has a long way to go, if it ever hopes to accomplish that. But if you think you can qualify for one its loans and you really need the money, that 6 percent rate sounds pretty low to me.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.